This past November, Amazon sent shockwaves across a number of industries by announcing Apple Music would be available on Echo devices. Earlier this month, Samsung announced Apple was bringing iTunes content to Samsung TVs. Apple also expanded AirPlay 2 support to include a wide range of high-end television sets. These announcements don’t represent some type of cultural shift away from hardware for Apple. Instead, the moves are part of Apple’s strategy to leverage its user base in an effort to establish one of the more formidable content distribution arms in existence.

Content Distribution

Apple has long held an interest in being the one to deliver content to its growing base of users and devices rather than leave content distribution to someone else. Apple’s content distribution arm delivers a variety of genres, listed below, to hundreds of millions of users and more than a billion devices.

Music
TV Shows / Movies
Apps
Podcasts
News
Magazines
Books

Apple has seen varying degrees of success when it comes to distributing content. With iTunes, Apple took advantage of the Mac’s low market share by getting the music industry to test a radical idea at the time: selling digital music online. iTunes ended up playing a big role in moving the music industry from albums to singles.

After years of strong growth, App Store revenue was approximately $45B in 2018. Apple has been a leader in the podcast space from the beginning. Written content distribution has proven to be trickier for Apple although the company has recently seen strong momentum when it comes to offering curated news to users in the U.S., Australia, and the U.K.

What Has Changed?

The landscape facing Apple’s content distribution arm is undergoing significant transformation.

Online streaming has taken over the music industry. The iTunes era of paid downloads is over as the idea of owning music is quickly becoming a thing of the past. Renting has become the preferred method of consuming music. The shifting landscape played a major role in Apple’s decision to buy Beats back in 2014.

According to the Recording Industry Association of America (RIAA), streaming now accounts for an astounding 75% of the U.S. music industry’s revenue. Digital downloads account for just 12%, slightly ahead of the 10% attributed to physical sales. In the U.S., approximately 50M people are paying a monthly subscription to consume as much music as they want. Globally, the total number of paid music subscriptions exceeds 200M. Apple Music has approximately 60M paying subscribers.

Turning to video, direct-to-consumer distribution has turned the industry on its head. Instead of the big cable bundle imploding, new, lower-cost video bundles such as Netflix and Hulu have exploded in popularity. These revised content bundles have the content people want to see, in addition to the distribution method that people want to use. More than 200M people pay a monthly subscription to consume video through these newer bundles. This number will continue to increase as notable names, including Disney, are about to enter the direct-to-consumer space.

One of the more interesting implications found with this new digital content landscape is how scale has been redefined. Success is no longer measured in the tens of millions of users like it was in the iTunes era. Instead, scale is measured in the hundreds of millions of users.

Spotify is the largest paid music streaming service while Netflix is the largest video streaming service. Amazon has seen the most success in the area of bundling access to content. Meanwhile, YouTube remains the behemoth in the ad-supported realm. Localized offerings in a number of emerging markets have also been able to capitalize on music and video streaming to develop compelling solutions, although few have seen success beyond their home territory.

The Strategy

Considering how Apple has approximately a billion users in its ecosystem, the company would appear to have enough customers to sustain a thriving content distribution arm. Such a strategy would involve Apple keeping its content distribution services exclusive to Apple hardware. However, upon closer examination, there is one complicating factor in such a strategy.

According to Tim Cook, there are 1.4 billion Apple devices in the wild. Given the number of Apple users, Cook’s disclosure means that at least 60% of Apple’s user base own just one Apple device. For hundreds of millions of people, the iPhone is likely that Apple device. This changes the dynamic facing Apple’s content distribution strategy.

Apple users are not monolithic when it comes to gadget buying. Instead of exclusively using Apple hardware, a majority of Apple users also own devices from other platforms such as Samsung Smart TVs and Amazon Echo speakers. Apple’s design-led culture and product development process ensure that there will always be product categories, such as TV sets and low-end stationary speakers, that Apple chooses not to play in or compete with.

With that in mind, Apple’s content strategy is as follows:

Develop content distribution platforms.
Give content distribution platforms the best chance of success by leveraging the user base and allowing certain content genres to be consumed on non-Apple hardware.
Provide first-party hardware solutions targeting users who are looking for the best all-around Apple experience.

In summary, Apple’s user base provides the company optionality when it comes to distributing content. By not keeping some of its digital content distribution services exclusive to its own hardware, Apple reduces the risk of its users turning elsewhere for content.

Odds are good that a decent portion of Echo speaker owners also use iPhones. Given how the predominant use case found with stationary speakers is listening to music, these users may have been tempted to try Spotify or Amazon Music. By bringing Apple Music to Echo devices, Apple is able to leverage its existing customer relationships in order to improve Apple Music adoption. The same principle applies to letting Apple users send content played on an iPhone, iPad, or Mac to non-Apple speakers or television sets via AirPlay 2.

Another assumption underpinning Apple’s content strategy is that a portion of the Apple user base will gravitate towards premium content consumption experiences. Apple has the opportunity to sell these first-party solutions, such as Apple TV and HomePod, to users willing to pay for the best all-around Apple experience.

Misconceptions

There has been much confusion in the press as to Apple’s content distribution strategy.

Apple is said to be deemphasizing hardware in order to grow services revenue.
Apple’s decision to bring Apple Music to Echo has been compared to bringing iTunes to Zune music players.
Apple is said to be no longer fully behind products like Apple TV and HomePod.

The preceding theories are off the mark.

A strategy characterized by Apple prioritizing services over hardware would revolve around Apple selling a $29 Apple TV dongle or a $29 HomePod mini speaker. Apple hardware’s function and value proposition would be altered to promote non-hardware Apple products. Neither device is likely to materialize as Apple isn’t prioritizing services over hardware. Instead, Apple is selling an Apple TV box priced at a 20% premium to a 32-inch TCL TV with Roku built-in. One HomePod goes for the same price as 12 Amazon Echo Dots or Google Home Minis.

When it comes to comparing Apple’s current strategy with that of iPod / iTunes, Apple didn’t have an ecosystem containing a billion users and 1.4 billion devices in the early-to-mid 2000s. Making iTunes available on other MP3 players, like Microsoft’s Zune, would have done little to improve iTunes or Apple’s broader ecosystem. The opposite is true today. Making certain content distribution platforms available on non-Apple hardware can help improve the service in question, which ends up adding value back to Apple hardware. In addition, Apple now has the ecosystem to not only target premium accessories to a segment of the user base, but also appeal to other users by bringing certain content distribution platforms to non-Apple hardware. A similar situation did not exist in the 2000s.

Speaking of premium accessories, Apple TV and HomePod are misunderstood products. The products are high-end accessories tasked with offering Apple users the best all-around experiences for consuming video content and listening to music, respectively. Making Apple Music or video available on other platforms does not change that dynamic. HomePod doesn’t have a weaker value proposition because Apple Music is available on a $29 Echo Dot. Apple TV is not kneecapped because AirPlay 2 support is available on a Sony TV set.

Motivation

Apple sees a massive opportunity in content distribution. There is a glaring weak point found in music and video streaming: brutal economics. Both Spotify and Netflix have business models in search of sustainability.

Spotify’s most likely path to sustainability boils down to amassing so many listeners that the balance of power begins to tilt towards Spotify and away from content providers. Either Spotify has to pay less for music, or the company will make a big move into original content.

Meanwhile, Netflix’s business model is based on a feedback loop that is consuming increasing amounts of cash. The move into original content is not proving to be a financial panacea either. Netflix clearly needs significant subscription price hikes over time, and the only way to guarantee those price hikes will stick is to continue ramping up content spending in order to sustain engagement.

Given Apple’s business model, the company doesn’t have to worry about such sustainability issues. Instead of releasing low-margin hardware that boils down to being nothing more than service conduits, Apple can use third-party hardware as Trojan horses for its own content distribution arm. This can be accomplished either by partnering with a company like Amazon to have Apple Music available on Echo devices or by expanding AirPlay 2 support to include a wide range of speakers and TV sets. AirPlay is a brilliant way of ensuring that an Apple product remains at the center of people’s lives.

Dedicated music and video streaming players will have to eventually prioritize profit and revenue. However, Apple has the luxury of not having profit be the motivating factor behind its content distribution arm. Instead, Apple is going for power. A few calculations prove this point. With Apple Music, 100M users paying an average of $7 per month would bring in $8B of revenue per year. Assuming 75% of that revenue goes back to music rights holders, Apple’s gross profit would be approximately $2B per year, or just 2% of Apple’s overall gross profit. Video streaming economics may end up being even less attractive from a cash flow perspective. Instead, Apple would be looking more at improving each service by grabbing scale and gaining influence and power in Hollywood.

Goals

Here are some of Apple’s specific goals for its content distribution arm:

Apple Music

Grab enough users to position Apple Music as a legitimate alternative to Spotify and Amazon Music. From Apple’s perspective, scale in music distribution has gone from being a liability during the iTunes era to being the key to success with Apple Music. The decision to bring Apple Music to Echo speakers is a clear attempt to limit Amazon Music and Spotify adoption, especially among Apple users.
Work more closely with the labels. By positioning Apple Music as an alternative to Spotify for the music labels, Apple is in a position to gain back the incredible amount of power it once had with the iTunes empire.
Capitalize on the changing way music is consumed by investing in better A&R capabilities. Playlists are gaining power in the realm of talent discovery. Capitalizing on improved ways to find new talent stands to improve Apple Music playlists and Apple’s relationships with music rights holders.

Apple Video

Convince third-party content creators to embrace the TV app. The key metric to watch in video streaming will be engagement. Accordingly, to have people spend an increasing amount of time in the TV app, Apple will look to establish a platform from which users can access various video bundles. This strategy resembles more of Amazon’s video playbook instead of Netflix’s. The idea underpinning this strategy is that video streaming won’t be a winner-take-all market, or even a winner-takes-most market.
Use original content to elevate the TV app. Since one form of differentiation in video streaming is great storytelling, Apple has been focused on developing its own slate of original programming. One thing Apple can do to stand out from Amazon is make its initial slate of original programming free for TV app users. The idea behind such a move is to get people using the TV app, which will then increase the odds of people singing up and paying for third-party video bundles through the TV app.

Bundling. There is an opportunity for Apple to bundle various content genres into one monthly payment. Music and video make the most sense for a bundle although news and magazines are doable as well.

Experiences. Apple is one of the few companies to have a diverse content distribution arm in addition to more than a billion customers and devices. This gives the company a unique advantage when it comes to fostering customer relationships. In addition, Apple can offer premium experiences to those in the Apple ecosystem by having its content distribution arm work seamlessly with entirely new hardware form factors.

Challenges

Apple faces various challenges in its pursuit of establishing one of the more formidable content distribution arms in existence. The most difficult task is found with video streaming. There is about to be a brutal war in video streaming as a handful of companies with deep pockets begin to compete with Netflix. We haven’t yet seen genuine competition in the paid video streaming space. In a scenario where there are only one or two all-powerful streaming services, Apple will find itself at a bigger disadvantage. On the flip side, greater competition could prove to be a benefit to Apple if it means other streaming services will want to work with the company and its TV app.

With music, Apple appears to be going back to basics and fighting for every user whether it’s through bundling deals with mobile carriers or keeping existing users as users. It appears to be working. Apple is proving to be a formidable challenger to Spotify despite many having already declared Spotify to be untouchable years ago. In addition, by maintaining good relationships with a handful of labels, Apple has access to tens of millions of songs. The entire dynamic is easier for Apple to manage.

In terms of written content, Apple is in a good position when it comes to relying on human curation to surface content. However, there are questions regarding scalability and just how effective Apple can be in convincing publishers to get behind such efforts.

Big Picture

It is not too late for Apple to compete effectively in music and video streaming. Meanwhile, the turmoil found in distributing and consuming written content through traditional social media vehicles is still in the early innings. This will give Apple its best chance of finally cracking written content distribution.

Despite slowing unit sales, the iPhone continues to fuel growth in the user base. Meanwhile, wearables are boosting the number of Apple devices in the installed base. Not only are these positive developments when it comes to strengthening the Apple ecosystem, but they also increase the number of people in a position to rely on Apple for content.

With a pair of smart glasses not quite ready to be unveiled, now is the time for Apple to dedicate precious time and resources to strengthening its content distribution arm.

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